Q&A #59 – What policies are recommended for a newly formed nonprofit?

Question: I recently formed a new nonprofit organization, adopted Bylaws, and will be applying soon for 501(c)(3) status. We anticipate having a relatively small Board of Directors with limited revenue and activities for the first few years. What policies should we have in place in the near term?

Answer: For new nonprofit organizations, Part VI, Section B on page 6 of the Form 990 is a good starting point to look for basic guidance related to which governing policies should be adopted in the organization’s early start-up phase. While some of these policies may not be relevant, most new organizations should start, at a minimum, with a conflict of interest policy, whistleblower policy, and document retention and destruction policy. Additionally, I recommend that new organizations consider adopting a code of ethics policy.

The conflict of interest policy (referenced in Part VI, Line 12 of the Form 990) is the highest priority among these policies, as it serves as an important tone and culture setter for a new organization. A conflict of interest policy is considered a must for any organization, and is specifically referenced in the Form 1023 application for 501(c)(3) status.

The whistleblower and document retention and destruction policies (referenced in Part VI, Lines 13 and 14 of the Form 990) are usually considered a must for any organization that will be conducting annual financial statement audits (which are often required by applicable state law once an organization reaches a certain size, or by the terms of an organization’s grants or other sources of funding). If the organization does not expect to conduct annual financial statement audits until it becomes larger, these policies can potentially be deferred for consideration at a later date. However, whistleblower and document retention and destruction policies are nonetheless generally recommended to enable the organization to check “yes” to Part VI, Lines 13 and 14 of the Form 990 and demonstrate a high commitment to ethical conduct to its constituents, funders, and the general public.

Certain policies referenced in Part VI of the Form 990 may not be applicable to your organization now, but could be applicable in the future as the organization grows and expands operations.

For example, organizations that have a paid chief executive position should adopt a compensation policy consistent with processes described in Part VI, Line 15 of the Form 990. However, this is not necessary for very small-staffed organizations that will not have a chief executive position and are mostly run by volunteers.

Additionally, most new nonprofits do not plan to establish local chapters, branches, or affiliates (Part VI, Line 10) or participate in joint ventures with taxable entities (Part VI, Line 16). These policies can be deferred until they become applicable to your organization, but should be adopted before the organization engages in these activities in the future.

Planning Tip – A key procedure to add that will support the conflict of interest policy is to have an annual conflict of interest disclosure statement process as we discussed in Weekly Thoughts #58 and Q&A #56. This procedure should be included when adopting a conflict of interest policy. Without annual disclosure statements, this most important policy is very hard to monitor and enforce. Also, by having annual disclosure statements, the organization can check “yes” to Part VI, Line 12c of the Form 990 and positively describe in Schedule O how the organization monitors and enforces compliance with its conflict of interest policy.

There is one key policy not referenced in the Form 990 that should be considered by all new organizations: a code of ethics policy. A code of ethics policy serves at least two key functions: it establishes that ethical conduct is important to your organization and educates Board members and others within the organization about their fiduciary duties and other requirements that they must fulfill in order to honor the organization’s commitment to accountability and transparency (including but not limited to compliance with the organization’s conflict of interest policy).

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